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A Limited Liability Company, or LLC, is a distinct legal entity. LLC owners, known as members, have “limited liability” meaning they receive liability protection, which is similar to a corporation. Creating an IRA LLC is one strategy IRA investors have used to purchase real estate. This gives you checkbook control a term used when an IRA holder has complete signing authority over his or her retirement funds.

How it Works

While you don’t have to create an LLC to invest in real estate in your IRA, an IRA LLC gives you easy access to your funds, so you can react quickly in a competitive real estate buying market. An LLC that is owned by your IRA needs:

  1. A business checking account set up in its name.
  2. A tax ID number (EIN).
  3. Articles of Organization.

Once the LLC is formed, the IRA is the owner or sole member of the LLC, and is managed by you, the IRA holder. The newly created business account is linked to your self-directed IRA funds. Electing yourself “Managing Member” of the LLC, entitles you to a check book that is directly linked to the business checking account, giving you control over the funds. Your IRA LLC is now a legal entity that can purchase assets outright.

Before entering into this type of strategy, it is best to seek advice from your legal or tax advisor. Entrust does not advocate nor endorses this arrangement. Our purpose here is purely to expose you to the strategies other investors have taken to real estate investing in their IRAs. Entrust merely facilitates the requests of IRA holders who have chosen to enter into this type of arrangement.

Benefits of Using an LLC 

Cost—Checkbook control can help you avoid the transaction fees and check-writing fees typically associated with a self-directed IRA. If you own multiple real estate investments in your LLC, Entrust only charges you for one asset, the LLC.

Convenience—Once you identify an investment you want to purchase, you can just write a check. You don’t have to fill out paperwork or get approval from Entrust; you can take care of it yourself.

LLCs must avoid prohibited transactions. Engaging in prohibited transactions causes the entire IRA to be disbursed, leaving the investor with serious tax penalties. It is up to you, as the IRA holder, to make sure that the IRA does not engage in activities that may jeopardize its tax-deferred status. See IRC § 408(e)(2) for more on transactions between an IRA LLC and disqualified persons.

Purchasing Property with an LLC

When buying property within an LLC that is owned by an IRA, it must meet the following requirements: 

  • The LLC must ensure that all IRS and Department of Labor tax rules and requirements are met.
  • If the LLC debt finances a property, the LLC must pay UDFI or UBIT
  • The LLC must distribute dividends to owners based on the ownership percentages outlined in the agreement. 
  • The LLC must be constructed properly.

If you would like to additional information about IRA LLCs, view our topics below:

Creating an IRA LLC
Buying an Existing LLC

NOTE: The Entrust Group does not sell or create LLCs. To learn about the specific requirements of forming an LLC, visit the IRS website or your local SBA district office for more information. We advise investors to seek proper legal counsel for an understanding of all requirements involved in LLC ownership.

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